Is there a way to test out homeownership before you do it for real? You might think renting is a good way to start, but it’s only part of the test. Being a homeowner comes with several other expenses most renters (and those living at home) don’t have to think about.
Test running homeownership means calculating all your theoretical expenses and “pretending” to pay for them. For example, let’s say your current circumstances lead you spend $3,000 every month but being a homeowner would cost $4,000 a month. The test run would mean spending that $3,000 and setting aside an additional $1,000 every month to simulate financial homeownership and discover if you’re ready for the real deal.
Step One
The first step in your test run is to calculate your income. If you’re going to buy with a partner (or more than one) be sure to include all of their incomes as well. This might be easy if you’re a t4 employee with one job or it might be more complicated if you are an entrepreneur, or work by contract or for commission.
Whatever your circumstances, the goal is to get an accurate idea how much money you take home each month. Don’t guess and don’t overestimate. The worst thing you can do is set yourself up for disappointment by assuming you make more than you do and then fail to get approved for the mortgage you want. Once you know how much you’re making put this number in the “income” side of a balance sheet for your test run.
Step Two
This step is more time consuming. It involves calculating your expenses. All of them. Here’s a list to get you started.
-mortgage
-HOA fees
-utilities (power, heat, water, sewer, garbage collection, etc.)
-property taxes
-home insurance
-other property expenses (repairs, renovations, furniture, maintenance, etc.)
-consumer debt (credit card, vehicle loan, student loan, line of credit, etc.)
-consumer expenses (gas, groceries, cell phone, internet, savings, insurance, and all other spending)
There are endless ways to spend your money, so keep in mind that this isn’t an exhaustive list. If you have expenses not mentioned in this list make sure to account for them in your test run.
Mortgage
You might know what your friends and family are paying for their mortgage but don’t assume you’ll be paying the same. Instead, opt for a mortgage pre-approval. This application will give you a good idea what lenders may be willing to loan you and how much your mortgage payments may be. Keep in mind that you don’t have to spend the maximum amount offered to you. Consider your income and existing expenses and pick a mortgage payment that isn’t going to leave you over extended. Once you have that number in mind, add it to the expenses side of your balance sheet.
HOA fees, utilities, property taxes, and home insurance
Before you own your own place it’s likely you’ll be paying for some expenses aside from your monthly rent. This might include electricity and heat. However, homeowners are responsible for several other expenses like home owners association fees, property taxes, home insurance, and other utilities like water, sewer and garbage collection. Additionally, utilities like electricity and heat cost more in a 3 bedroom house than they do in a 2 bedroom apartment.
The best way to find out how much these property related expenses will cost is to ask people who live in homes similar to what you want to buy how much they are paying. After that you can check out some open houses and ask the realtor what expenses there related to the property and how much the current owners have spent on these expenses in the last year.
With these numbers in hand you can add them to your balance sheet for your homeowner test run.
Other property expenses
The biggest regret millennial homeowners have is not knowing how much the “other” expenses were going to be. This includes things like repairs, renovations, furniture, maintenance, upkeep, and emergencies. Buying a lawn mower (because you didn’t have a lawn before becoming a homeowner.) Buying more furniture (because you bought a bigger place than you were in before.) Replacing the furnace or hot water tank (because you bought an older home.) Replacing a window (because your kid is learning to play ball.) Buying a snow blower (because we live in Alberta and you don’t want to break your back using a shovel.)
You never really know how much these kinds of expenses are going to cost but experts suggest that homeowners plan on spending 1% of the cost of their home each year on maintenance. If you spent $500,000 on your home then budget for $5,000 every year on maintenance. If you don’t spend it one year, put it aside for the future when you’ll eventually have to use it. Add this number to your test run balance sheet.
Consumer debt
The average Canadian has a few thousand dollars in non-mortgage debt. This includes things like a student loan, credit card balance, vehicle loan, line of credit and so on. Find out how much money you spend on debt each month and add it to your balance sheet.
If you have the opportunity, it’s a wise choice to get rid of as much existing debt as you can before you try to buy a house. Firstly, it will make your financial life a little (or a lot) easier to handle. Secondly, it will improve your debt-to-income ratio and increase your chances of getting approved for the mortgage you want.
Consumer spending
You probably don’t track every dollar you spend in a month. But now is your chance! Sounds fun doesn’t it! Well, even if it sounds like the worst thing ever you’ll have to do it for your test run. Groceries, gas, a night out on the town, new clothes, internet, cell phone, vehicle and health insurance, savings. Spend three or four months tracking every consumer dollar that comes out of your pocket and add your monthly total to the expenses in your balance sheet.
Test run on paper
Once you have all your numbers laid out you’ll be able to see right away whether or not you can afford theoretical homeownership. If the numbers don’t line up in your favour it’s time to do some work. Start by seeing what you can do to increase your income. After that find ways to decrease your expenses.
Decrease your mortgage payment by buying a smaller home than you had planned. Trade in your vehicle for one with a smaller payment (or no payment at all.) Downsize your cell phone plan. Buy groceries on sale and eat out less. Limit your contributions to savings or retirement plans. Cancel your cable subscription (who watches cable anyway?)
If homeownership is the goal then find a way to make it work for you.
Test running homeownership
Once all the numbers are lined up on paper it’s time to put it to the test. Spend six months to a year spending as though you already have the financial obligations of homeownership. This means that if your current situation costs $3,000 every month but owning a home will cost $4,000 you’ll have to put aside the additional $1,000 every month to simulate the experience.
If you discover that this kind of spending doesn’t work for you, you can rework the numbers and try again or you can make some changes in your circumstances and try again in another six months.
Alternatively, if you find that you can comfortably (or at least reasonably) live with this kind of budget then you’re probably ready to move on to the real thing. Call us today to get started or for more information on how to navigate a test run on homeownership!
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